Sell bonds, buy peace of mind

Martin Pring is president of
Pring.com a technically oriented educational web site and chairman of Pring Turner Capital, a conservative money management firm. He is the author of
Technical Analysis Explained, now in its fourth edition and seventh language. He is a recipient of the coveted MTA Annual Award, Canadian CSTA Jack Frost Memorial Award and a fellow of the British Technical Society. His latest (co-authored) book is “Investing in the Second Lost Decade.”
He helped create the Dow Jones Pring Business Cycle Index (DJPRING), a dynamic rules-based model designed to help institutions and individuals. An actively managed ETF (Symbol DBIZ) based on the strategies used in the Index,
trades on the NYSE.

In the opening sessions of 2013, government bonds lost more in terms of price than they earned in 2011 from interest. That's a pretty scary thought, but my indicators are telling me that this is just the tip of the iceberg, regardless of Fed bond buying and zero-interest-rate policies.

Chart 1 (click here for chart) offers the principle reason for my bearishness. It compares the price of the Barclay's 20-year Trust (TLT) bond ETF with our Bond Barometer. The TLT has not been around for very long, so it's been spliced to a price series derived from the yield on 20-year government bonds.

The Barometer is constructed from several trend, momentum and inter-asset components. When it falls to the 50% level or below it goes bearish and earns a red highlight on the TLT plot.

You can see that it has just fallen into negative territory. Bonds hate inflation, so it would be nice to point to some encouraging factors on that front. Unfortunately, the opposite is currently the case, as a similar model for industrial commodity prices has just turned bullish.

Chart 2 (please click here for chart) reinforces that idea. It features the CRB Spot Raw Industrials, an economically sensitive commodity index. You can see that the momentum for the ECRI Weekly Leading Index, a forward-looking economic indicator, has just crossed above zero. The arrows show that previous crossovers have offered very timely signals that a new commodity bull market is underway.

If U.S. bonds are likely to tank over the next few months, you might think that international bonds would be a safer bet. Chart 3 (please click here for chart) argues otherwise, since the KST, a long-term smoothed momentum indicator, has been declining since 2011 and has been registering a series of lower peaks in the face of a rising index for the last nine years. This long-term negative divergence is a sign of deteriorating momentum, but what's to stop prices working their way still higher and the oscillator moving lower? Nothing, until the price confirms this weak action with some kind of trend reversal of its own.

That's exactly what happened at the end of January. In this case, the signal was a violation of the very long-term or secular uptrend line. In technical analysis a trendline gains its significance from its length, and the number of times it has acted as a successful launching pad for a rally. This one scores on both counts, as the 12 years it has been in existence is a long time. Furthermore, it has been touched or approached on six different occasions and is therefore an accurate reflection of the underlying trend.

Here is the rub. In the six years between May 2006 and June 2012, the world's six biggest central banks expanded their balance sheets almost threefold from $4.9 to just over $14.09 trillion. When just a fraction of that that money hits the economy, the global economy will unquestionably experience a dose of inflation. Our commodity Barometer buy signal suggests that that process is now underway.

With skimpy current government-bond yields of 2%-3%, it seems to me that the risks completely outweigh any potential rewards. With my bond and commodity models having just moved into an inflationary mode, buying bonds today could be equated to buying stocks in September 1929. A slight exaggeration perhaps, but I think you get the picture. My advice — Sell bonds and buy peace of mind.

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